Deeble Construction Co: Value of Options

Question: Deeble Construction Co.'s stock is trading at $30 a share. There are also call options on the company's stock, some with an exercise price of $25 and some with an exercise price of $35. All options expire in three months. Which of the following best describes the value of these options?

- The options with the $25 exercise price will sell for $5.
- The options with the $25 exercise price will sell for less than the options with the $35 exercise price.
- The options with the $25 exercise price have an exercise value greater than $5.
- The options with the $35 exercise price have an exercise value greater than $0.
- If Deeble's stock price rose by $5, the exercise value of the options with the $25 exercise price would also increase by $5.

Solution Preview

The best answer is e: If Deeble's stock price rose by $5, the exercise value of the options with the $25 exercise price would also increase by $5

Option Value = Exercise (Intrinsic) Value + Time Value

e. If Deeble's stock price rose by $5, the exercise value of the options with the $25 exercise price would also increase by $5
is correct because
Exercise ...

Solution Summary

This solution is compromised of a detailed response which outlines the correct answer for this problem and explains why the other options for this question are incorrect. This is all completed in about 270 words.